Media & Marketing

BEHIND THE NEWS: Emmis stock is out of favor, but is future really so bleak? Outsourcing firm plans IPO

April 11, 2005

The radio industry receives abysmal press these days. Bears note that advertising revenue has grown sluggishly in recent years, despite the economic rebound. And they quiver over new competition from satellite radio and the iPod.

So is this the time for investors to flee the sector? Or to pick up a few bargains?

Contrarians may want to take a closer look at hometown broadcaster Emmis Communications Corp., which will announce fiscal fourth-quarter financial results April 14.

Certainly, these are not the best of times for the Indianapolis company, which owns 25 U.S. radio stations, as well as 16 TV stations, Indianapolis Monthly and other magazines. Its stock was trading last week at $19, virtually unchanged for the year but far below its December 1999 high of $62.

As Emmis CEO Jeff Smulyan told IBJ last week, "American media has struggled. ... Nobody is satisfied. There has not been value created."

But Smulyan, 58, has ridden the radio waves for a long time. And as he told attendees at a Banc of America conference in New York City March 30, doomsayers appear to have lost sight of some fundamental strengths.

For one thing, Smulyan said, traditional radio captures just 8 percent of advertising spending, even though it garners nearly one-third of Americans' media usage. And he noted that Americans' commutes are growing longer, adding to the time they spend listening to the radio.

"One thing I've learned in life is you're usually never as good as you think you are on your best day, and you're never as bad as you think you are on your worst day," Smulyan said at the conference. "Radio, I think, is starting to come back because some of the criticism of radio has been overstated."

While times may not be robust, he said, Emmis has been among the top performers in every one of its fields of business. And he boasted that Emmis is one of the few broadcasters to land on Fortune magazine's list of 100 best places to work.

"We think that matters," he said at the conference. "In a business that is as management-intensive as the communications industry, having a work force that is committed to achievement makes all the difference in the world."

But before you go out and scoop up Emmis shares, consider the naysayers, such as Stanford Group Co. analyst Frederick Moran, who reiterated his "sell" recommendation on Emmis last week.

Moran said the company benefited handsomely from refinancing debt last year. But because of rising interest rates, it won't be able to do the same in 2005. Further, he fretted that Emmis' TV stations will have trouble topping their performance last year, when they received a lift from political spending and the Summer Olympics.

"The lack of radio industry growth during the economic recovery has us concerned about what might happen if the economic growth wavers in the second half," Moran wrote. "We see no signs of a material rebound for radio."

Similarly, Morningstar Inc. analyst Michael Corty worries the company has too much debt as a result of spending $1.5 billion for 20 radio and TV stations over the past five years.

"Past acquisitions have been painful for shareholders, and the future is clouded by large payments Emmis will need to make to service its debt," Corty wrote. "Management has indicated that improving the balance sheet is a top priority, but it's difficult for us to believe additional value-destroying deals won't occur over the long haul."

Harsh words, indeed. But contrarians aren't called contrarians for nothing. Those willing to look beyond the obvious debt challenges will note that the company has made substantial strides putting its financial house in order.

For instance, the refinancing freed up cash to reduce debt. That's allowed Emmis to sharply reduce its interest expense, from $129 million in 2002 to $68 million last year, financial statements show.

To executives of Conseco Inc., the name ExlService conjures up painful memories. Four years ago, Conseco bought the outsourcing firm as part of its plan to ship 800 back-office jobs to the low-cost labor market of India.

Trouble was, the move didn't work, thanks to high turnover, communication obstacles and other setbacks. Conseco ended up selling Exl for a loss a year later, returning jobs to the United States.

But from that adversity, Exl executives see opportunity. The company, headquartered in New York and now known as ExlService Holdings Inc., has filed to become the first outsourcing company with substantial Indian operations to go public.

The outsourcing company wants to raise $75 million through the stock sale. In the prospectus, Exl acknowledges its awkward parting with Conseco but seems to chalk it up as a learning experience. "Our expertise stems from our early association with Conseco," it says.

Exl racked up $43 million in revenue in the first nine months of 2004. More than three-quarters came from two firms, U.K.-based Norwich Union and Texas-based Dell Inc.


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